The fog on the Rhine's all mein, all mein, the fog on the Rhine's all mein

Late last month I predicted a German credit downgrade would be the next
logical step in the euro crisis. That took a dramatic step closer on Monday
after S&P placed Germany, and a host of others, on "creditwatch
negative".

A combination of markets and plebiscites could yet derail the Sarkozy-Merkel plan, resulting in yet more crisis and confusion.Photo: Bloomberg

The euro crisis is alive and well for Angela Merkel and Nicolas Sarkozy. To solve it, the 17-member states need to merge under a single set of fiscal rules to mirror the single set of monetary and currency rules they abide by. Anything less and the markets will win (having already overthrown two elected governments). Succeed and a United States of Europe emerges.

Having failed the market's test, until now, the eurozone's two most important leaders offered proposals they think will calm investors and reopen credit markets. Yields certainly fell in the most toxic countries. But now comes the biggest challenge – convincing the people.

Political solutions to the eurozone crisis, including this one, have lacked democratic legitimacy. There are presidential and legislative votes in France to come before this latest treaty is ratified, which will be key. But other countries may also want to vote, quite apart from the British. The loss of sovereignty implied in the new treaty needs testing and, until the eurozone votes for it, the markets will always question its legitimacy.

With its talk of golden rules, automatic sanctions and budgets moving towards "equilibrium" it has all the flawed hallmarks of the previous stability and growth pact, liberally flouted by member states.

A combination of markets and plebiscites could yet derail the Sarkozy-Merkel plan, resulting in yet more crisis and confusion.